A top Federal Reserve official and likely next chairwoman, Lael Brainard, has stated that the economy is likely to make a complete recovery from the Covid-19 pandemic, and advises against preemptively calling on the central bank to raise interest rates.
At an economics conference yesterday, Brainard shared her views on how the pandemic has, contrary to popular belief, not altered the underlying labor supply and demand. According to her, “I expect inflation to decelerate, and pre-Covid inflation dynamics to return when Covid disruptions dissipate. Once Covid constraints recede, I see no reason the labor market should not be as strong or stronger than it was pre-pandemic.”
Brainard also offered a warning, stating that while economists and policymakers often worry about a diminished supply of labor directly following a downturn, which they believe leads to persistent inflationary pressures, the outcome is often that workers simply seek employment once expansion matures.
Although she confirmed that the recent surge in prices effectively places the Fed’s preferred inflation gauge over 4% for 2021, which is far off from its 2% target, she believes that this is not reason alone to believe that a return to pre-pandemic growth is impossible. Despite this reality, her outlook remains positive: “while the playbook for guiding inflation back down to target following a moderate overshoot is well tested and effective, experience suggests it is difficult to guide inflation up to target from below.”
In effect, she shared that she had been “more concerned about the Fed failing to meet its target in the years following the recent surge in inflation because of inflation remaining somewhat lower than 2%, as it did last decade.”
Her final piece of advice, based on the Delta variant’s spread, is that there are several ways of looking at economic outcomes, and sticking with one singular perspective is not the wisest choice. While Brainard shared that she has focused on how the variant illustrates the risks of weaker-than-anticipated growth and consumption, her colleagues have reportedly focused on the risks of stronger-than-anticipated inflation resulting when supply-chain bottlenecks are extended. As such, she stated, “Delta highlights the importance of being attentive to economic outcomes and not getting too attached to an outlook that may get buffeted by evolving virus conditions.” Adopting this mindset will be crucial as the country presses on its economic recovery.
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